What Aziz thinks about Marg

Several of our Value readers has sent request on Marg in last few days and a hot discussions going on our blog, I thought to share my views and analysis on Marg.

There also seems confusion on how to approach our quality & performance ratings and on our techniques of calculating values.

Let me clear up the dust before getting into Marg. Value Operations platform is not a platform that predicts the price movements or gives any tips on direction of stock price or generates buy sell signals.

The Value Operations platform needs to be seen as a smart tool that can help you in your research so that you can take educated decision. Quality ratings and valuations are both independent and are not attached to our personal view or opinion.

We measure the quality of business not on what management wants us to see but looking at real facts and what really is happening. Let me give you an example, if you look at Marg 2010 -11 Annual report, on page 4 they have printed in large caption and mentioned about ‘Numerical growth’ with asertix on it. They mentioned that book value grew by 46% and profit after tax by 49% compounded rate in last 5 years. (All these figures are on standalone financials!).

If I look at consolidated reports than profit after tax grew by 30% and book value grew by 38% at compounded rate in last five years! This calculation is also made without factoring equity raised by management in last 5 years! Also management might be feeling shy to talk about the compoundedgrowth in its borrowings and cash flow situation, and thought to ignore it in their Annual Report.

Whether you talk about standalone or consolidated reports, both do not impress me to invest with Marg. There is plenty of business risk associated with this business. Though this business will see its returns to up tick but I am not convinced with the capital allocation made by management. The growth in earnings or after tax profits is not organic. There is nothing new about it; if you chip in more in your bank account too your earnings grow.

Do you think management of any company will come out and say anything negative about the company they manage or talk about it openly in interviews? They will never come out and keep their foot at wrong end. They all love their jobs.

Managing business and investing in business are two separate line of Business. Investors should focus on what money is ‘going out’ and what is ‘coming in’ the business.

Few of the drivers that motivate manager (management) to make acquisition or other decisions are as follows:

– The desire to be bigger

– Pressure from institutional investors to ‘grow’ revenues and profits.

– The desire to increase share price

– Pressure from institutional investors to ‘grow’ faster.

– Pressure from corporate advisers and lenders to take advantage of low interest rate and borrow more.

The approach that I take while investing in any company is that, I am happy to buyout the whole business or keep investing in that company and be one of the biggest investor of that company if its earnings are quality earnings.

Talking about Marg, Value Operations quality and performance rating for this company is C4.

Let’s look at the capital history of this company for last 5 years:

The speed at which debt has been increasing consistently and incremental capital (Networth), the profits looks like flat in the chart. The company had total assets of 3,045 Crore as of March 2011 and generated profits of mere 18.68 Crore that represents 0.61% return on their total assets.

The return of 0.61% on net tangible assets suggest to me that there is virtually no economic goodwill and such business should sell for no more than its net tangible asset, and arguably very less.

Let’s look at the cash flow situation for Marg:

The big purple bar is a money required by company to fulfil its capex requirement and running of the business. Almost entire fund was supplied from borrowings. I am stun to see that this business has not generated a single rupee from its operations in last 5 years and last year they required 800 Crore rupees to fund their hunger to grow and run business. There is a real tough question for the people who talk about business cycle to throw some light on how much more time and extra money required investing to see some handsome profits from this business?

Many of you would argue that they are still in investment mode and need cash to facilitate their projects and once they are fully operational their cash flow will be in positive. Let me segregate what kind of funds was used in maintenance and what was used as capital expenditure. In 2009 they required 600 Crore, out of which only 375 Crore was used as capital expenditure. In 2010 they used 500 Crore and 570 Crore in 2011 on Capex.

The rest of the balance money was used in maintenance. These are the basic characteristics of capital intensified business. To create any real value for shareholders, Marg will have to generate high cash flow from their operations to pay their maintenance bills, dividends, service their debts, pay taxes and left overs to be used to deleverage/ investment.

They have plans to invest another 35 – 40 thousand Crore for investment. Marg is still burning cash to run its operations. Their profits before tax margin in 2011 was 7.32% and to stop burning shareholders cash excluding their capex requirements they need to generate between 200 – 300 Crore to pay their bills. This translates that they need to do business of at least four thousand Crore and report profits in that range.

They have to really do well then breakeven if they want to go with their investment plans. The real value is created when majority of Capex expense are funded internally through their cash flow or they have sufficient money to service their debts. Marg is missing out them.

The biggest threat to any investor is equity dilution. I won’t be surprise in near future this company is very close to raise equity to fund its future projects or to repair their Balance Sheet.

Finally, coming to the valuations, as this business does not report consolidated quarterly reports, it is very hard to value this business ongoing because of lack of information available.

As mentioned earlier, you cannot value this business and take decision on standalone results. Our model calculated its intrinsic value for March 2011 as Rs 21 on its book value of Rs 106 and reported profits of 18.68 Crore.

We are expecting its intrinsic value for March 2012 to be Rs 60 and expect them to report profits two and half times more of reported March 2011. We also expect Intrinsic value for March 2013 to be Rs 221. Many investors might be feeling uplift to see that kind of performance. But hang on, look at the mountain of debt allocated and amount of money they are spending! It is important that they cut down their expenses and start generating cash from operations at least half of their required fund. We consider this business is trading at premium to its expected 2012 value. We need to draw line somewhere, looking at the attractive future valuations you might get tempted to buy this stock. But it is risky to take decision on only valuations and ignore quality of the company. Don’t forget that increment earnings earned by company are on back of debt and is exposed to high risk. Any upset in revenues or earnings will have direct impact to its future value.

Remember, we shared that we believe in Ben Graham theory that in short term market is like voters machine where investors register their popular stocks but in long run it behaves like weighing machine and ‘values’ business not on momentum but looking at business economics.

In March 2011, Marg was trading at Rs108 levels and had fallen down from Rs 190 levels of 2010 and same period Nifty had climbed from 5200 levels to 5800 during the same period. Market is full of irrational investors!

When prices of any stock fall substantially does not mean they are trading at cheap. They might be still costly to acquire!

Again, you have to take my analysis on Marg as a second opinion or as a research paper to compare with your research. Your views on company are most welcomed. Also, if there are any companies you want me to write my views then just go to the comments and leave names of 3 companies. I will endeavour on each and everyone of your request on fortnightly basis, starting with most commonly requested first.

Small correction, Marg do not have plans for capex of 30-40 thousand crores and it is 3-4 thousands of crores over the period of this decade. Again I know this company is rated with poor ratings going by the logic of spending less and earning more. If this is right kind of analysing business, then no capital intensive projects like Ports, Airports, Free Trade Warehouse Zones, Railways, Power projects etc..will not be there permanently and no investments will be made in countries and all will lack the basic facilities of life.

These kind of projects require hundred/thousands of crores before one earns a rupee. So when business is investing these amounts we should have patience till it reaps the money. One should know complete cycle of business and how it works. Debts increase recently is due to increasing Port capacity from 5million tons to 28m tons which is 5-6 times. All major capex is over now they will not touch Port till 2015 for increasing capacity so no capex in Port in next 3 yrs and From FY13 it is reaping time. FY14 and FY15 are perfect years to judge Marg company returns. Let us keep this stock on track for 3 yrs till 2014/2015 where mngt telling one billion company.

My question is if Marg businesses are so waste why promoter is buying massively from 40% plus to 75% from FIIs / open market. So does that mean he is wrong or misguiding investors or we are wrong in understanding/seeing company future prospects. God only knows how this investment world/finance works in this planet. Thanks anyway for your views.

Dear Aziz,
Basic purpose of investing is to earn money exceeedingly well, but million dollar question is how to do it? Internet and books are full of material but there is no definite secret formula. Reason is simple – Investing is a game of probability or simply speaking high risk/reward equation.

Lets take of example of PI Industry. Those who invested in 2002 by now they are seeing their money has become more than 100 fold! If one has invested 1 Laks then by now it worths 1 Cr+ and more yet to come in future. BUT…above is a analysis in hindsight. In 2002 situation might not be so clear hence stock was available at 6-8 Rs only. Now after 9 years its 600+.

So I feel getting in for PH-I is difficult but one can hope to looks for stocks who are in PH-II. If all goes well then wealth swell obscenely or otherwise. BUT…it comes with a risk too, any mistake on right judgement of future will result into permanent loss of capital too [SKS Micr, AK Caps etc].

You have done above analysis based on Consolidated results and not based on stanalone results. There is one relevant point. There is basic difference between Marg and other companies when it comes to Consolidated results. Normally what everyone know is Consolidated results should be more than Stanalone results atlreast at revenues level. But for Marg Consolidated results are less than Stanalone results for last many years. Why it is so? would like to know the reason for the same. That is where the key is for this company. Marg is not easy candidate to study simply based on Consolidated results. If one is not able see kind of assets it is creating and future estimated revenues these assets generate YOY then there is not much worth one will find with the company. Thanks.

Every business will have its own dynamics. Marg Karaikal Port is only major private port in and around Chennai, that competative advantage for company. For any other big company it will take 2-3 yrs to build 25-30 million tons of Port capacity and not easy job as it requires govt license etc.I am quite surprised with analysis which ignored the Port business operating margins of 50-60% and debts can be taken easily taken care with these kind of huge margins at gross levels with increase of scale of operations/economies of scale. Why? Port capex/interest costs stable after Port major capex but increasing revenures with big margins will provide sufficient cashflows to meet costs associated with project. One may check how this works by seeing Arshiya international FTWZ business with similar kind of operating margins of 50-60%. Last year Arshiya Mumbai FTWZ is operational, This year it going earn 60-70% higher profits than last year in spite of huge capex it is spending. If you observe margins at operating level and net level both are increasing QOQ due to revenues flow from higher margin business. This trend and growth will continue in coming years as per mngt views. Marg Port, Marg swanaboomi. Marg properties, Marg junction are very higher margin business and nascent stage of operations at present with huge capex gone into them and ready to take off from this year. So one has to give two years to Marg and one may decide this company based on financials of FY14 onwards. If one pays too much attention to paper figures without seeing what is actually happening in the company, in which businesses/assets it is investing and their potential future earnings, at what stage these projects are then these figures and study does not make much sense to investors. Thanks.

Hi Nagshwa,
Sorry for that typo mistake.
I do understand your concern that no one will invest in capital intensified businesses for the community and we need those industries in our day to day life. But to be succesfull in stock market you need to take decisions on purely Capitalist point of you. You are not investing for the community. You are investing for yourself.
I do know that their port capacity has gone up from 5 million tons to 28 million tons. Till Dec 12 Quarter they managed 4.39 million tons and generated profits after tax of 25.3 Crore rupees from that business. Once they start managing 28 million tons, this business will generate net profits in range of 150 – 200 Crore. If I take very opportunistic figure, then they might in future generate net profits in range of 300 – 400 Crore (20 times more then 2011 profits!). But same time do not forget that this business needs around 150 -200 crore every year to keep running their business (incremental capital). I do not see growth in income any more untill their phase 2 and 3 investment commences. I might be sounding like I am exaggerating mainteanance cost, so lets halve that, still need approximatley 100 Crore in maintenance every year. Is 300 Crore in earnings after investing 3,000 Crore is a good business? This is what you have to decide on your investments.
Promoters might have their own reasons to buy their stocks. The best person to answer that question is promoters itself. I do not register promoters buying as a buy or sell signal in vice versa conditions.

Hi Nageshwa,
It is not rule of thumb that Consolidated reports figures should be bigger than Standalone. You better know about this than me as few months back, you only showed us how important consolidated reports are in Indian market. Hope once the IFRS comes in India then we will not have any issues with these confusions.

Hi Appa Roa,
A very interesting perspective on investment.
Every stock is different. Look at the PI industries Cash flow and compare its net cash generated from operations with reported profits and capital history. You will get the answer why it outperformed.
The style that we advocate helps us to mitigate with those risks and still generate healthy returns. It helps you to sleep in night and helps get rid of anxeity.
Investing is not rocket surgery – as the humorous quip goes. At the same time , there are no short-cuts. If an investor wants to get great results, than he or she has to work for it. This requires diligence, patience and flexibility. You need to know when you’re wrong, and what to do when you are. And it requires fortitude. You will find our approach invariably means we buy stocks that others hate, and avoid those that others love.
You will find many times I tell to everyone, Price is what you pay; value is what you get. Charlie Munger advocates to buy great value by paying cheap price. Marg is not cheap at current price and I am happy to let go this opportunity, if it is, as I have identified many risks, that may be you and many have not.

Hi Nageshwa,
If all those projects are so attractive than why did company did not managed positive earnings?
There is a simple logic that many of you are ignoring. Debt is debt and it needs to be paid off. It is in shareholders interest that debt to be paid off from left over surplus cash after paying dividends and other obligations.
Let me explain in little detail, when the owner of the business have only put in little of their money and borrowed vastly larger sum, the return on equity will look very attractive. But watch out.
A high level of borrowing in a mix of business funding suggest to me that an attractive rate of return (which is still not achieved in Marg case) may not be supported by a sustainable competitive advantage. Over here I am not talking about the debt at single point of time but the manner it has changed over the years.
Constantly rising levels of debt over time should cause you to look suspiceously at the company. If used for expansion ( as in Marg case), the rising debt suggests an eagerness to grow quickly. Any downturn in the performance (revenues)will produce a significant re-rating of the market value of the company. In last 3 years Marg has generated net profits of 2% on their gross block of Asset. Same time their gross assets have grown by three and half times and their working capital by two and quarter times.
All these translates to me that a good proportion of funds have gone into mainteanance of business competitive position, and all this reflects from lack of growth in profits.
In reality there exist no shortage of companies whose debts has increased materially and yet profits have failed to do the same.
The management is talking about becoming 1 billion Rupees company (100 Crore in profts) very soon. I look at this as poor performance on investments of 3,000 Crore in business. At 8% interest, investment of 3,000 Crore will fetch 240 Crore! What achievement is management talking about?

Thanks Aziz for coming to the exact point/future projections discussion. Let me quote your projections. Agree to all your other points except the manner you have calculated the future profits/PAT for this port.

Till Dec 12 Quarter they managed 4.39 million tons and generated profits after tax of 25.3 Crore rupees from that business. Once they start managing 28 million tons, this business will generate net profits in range of 150 – 200 Crore.

Small correction please, Till Dec 11 quarter Marg port made PAT of 25 crs at 4.39 m tons capacity. At 21 to 28 m tons capacity you are taking 150-200 crs PAT and you are doing simple math of 25 crs multiplied by 6-8 times capacity increase. I believe this business will not work out like this. There are concept of ECONOMICS OF SCALE meaning in initial stages Port has to incur so much related infrastructure apart from building the berths which are earning actual revenues and all these are one time costs, will not there every year. Because of all these in first stages of Port operational, one will see huge debts followed by high interest and does not mean the same trend will continue with the increase of Port capacity. Due to this Economies/Savings with the Scale of operations at 9m ton capacity Port will make not 50 crs and will make 70-80 crs and At 14 ton capacity it will not make 100 crs and it will make around 150-160 crs. At 21m tons it will be around 300-400 crs range. At 28m tons it will be around 500-600crs range. Of course figures may be more than this or less than based on how efficiently company is managing the Port operations. This is where the difference between the opinions. To see how Economies of scale is benefiting the margins, please refer Mundra port early 2000 years and may refer Arshiya International this year. Arshiya top line is increasing at 20-30% level but bottom line is increasing with 60-80% range from last few quarters which is double/trible the speed of top line. Your views are welcome after seeing Arshiya recent quarters and Adani Port initial years, that is where you will find this concept. Thanks

For Marg case that is is relevant issue. Marg parent business, EPC business doing the internal jobs like construction of Ports,Airports, Real estate-housing and commercial projects. all these separate subsidiary companies. All these subsidiaries are investment stage and yet to earn revenues more than its costs. As such when company consolidating its financials excluding inter-company transactions/adjustments, Consolidated results looks worse than standalone results due to obvious reasons of subsidiaries are yet to make their substantial earnings and their costs are more than revenues in initial years. Going by this logic, do you think it is justified to view Marg future based on Consolidated results at this stage. I believe Marg consolidated results are seen after these subsidiaries break-even and start earning more than their costs then these subsidiaries profits will be added to parent company which will results in big profits on consolidated basis. So You are requested to understand at which stage this company is/its projects are, then try to see the future then you will see good future prospects for this company. Simply to say, you are welcome to view this company consolidated results from FY14 onwards and not at this stage which will lead to incorrect views on company future. Thanks

All ratios are to be calculate after subsidiaries starts earnings more than costs as I told by above two replies. All these ratios and analysis makes sense only after two years till such time it is better to view this company from stanalone results which gives some good picture. This company is not easy case for putting value/see future outlook as it is not straight case so till FY13 you may view this company on standalone results and after FY14 based on consolidated results. If this company does not able to make 200-300 by FY14 and 300-400 crs comfortably by FY15 on consolidated level, I do not mind agreeing to your poor ratings.

Promoter buys/sells will be treated by positive/negative by the investors/market particularly when promoter is doing massive buying and massive selling. May be this feature you have add in your platform to give some positive points/nagative points based on promoters buy/sell. Just think over this issue as platform has to dynamic to the latest developments in company including promoters buys/sells. Thanks

If I view this company from standalone results till now, their earnings looks good some years and not OK in few years due to obvious reasons. Let me explain till 2008 year Marg used to earn ROE of 20-25% range which is good. In 2009 ROE is decreased to 12%, may be due to recession/Marg port phase 1 capex. In 2010 year its ROE increased to 18% and In 2011 year it is 10% and even for FY12 ROE will be around 10-12% though on paper it may be 18-20% due to one time income this year which Port phase 2/other big capex time period. So in the medium term patent company may earn 15-25% ROE over the years which is not bad. After this capex is over focus will shift from parent to subsidaries as these candidates start earnings more than patent over the years contributing more to bottom line than parent company. So this company has to viewed based on stanalone business till major capex is over and after capex starts good earnings, has to be viewed from consolidated or in worst case one has to seen both financials simultaneously YOY for some years. Seeing from Consolidated picture at this level do not make business sense. Adani group Mundra port may looked at from last 10 years picture one will see similar case of debts increasing sharply before the revenues and ROE from single digit to double digits with 20% plus ROE in last 2 yrs. It is same case whenever Company takes expansion its debts will increase sharply and within 2-3 yrs earnings will catch up with debts. Thanks.

To justify my projections, let me give Mundra/Adani port revenues from last 5 yrs analysis. Total revenues from 2007 to 2011 increased to 581 crs to 1881 crs but Profits increased from 187 crs to 986 crs increasing net margins from 33% to 55%. Meaning revenues has become 3 times from 2007 to 2011 but profits has become 6 times which is double the speed of revenue growth which is due to ECONOMIES OF SCALE concept. That is big concept which you have missed in your future projections for Marg port. That is power of big assets like this and once economies come into picture, debts will be over-looked against the present trend of terrifying by so called huge debts. Hope this makes my point very clear. Thanks

I will buy MARG when it start giving 30-50% q to q bottom line, I am ready to buy at higher price than CMP. Now we should look into REC/PFC/PTC FINANCIAL which has given more than 50% in short period. We should concentrate on how to income quick from current bullish phase and then try to find VALUE BUY and reinvest these money selling financial stocks. I did it in 2011. I had buy CLARIENT/CASTROL/RALLIS/PIRAMAL HEALTH/SRF/BAJAJ FINANCE and in it helped to protect my portfolio in whole 2011 and then again I sold them ( except CASTROL) in october 2011 to buy IDFC, PFC, CORPORATION BANK & PTC FINANCIAL, STERLITE and earned quickly net 50% gain in recent bull run. Now again I have slowly offloading them to buy my VALUE stocks. we should follow the trend it make our day pleasant.

Hi Nageshwa,
All of your comments translate you are too optimistic about this company. You are missing out on what can go wrong with this company. The figure of 150 -200 Crore was calculated after considering working capital and current asset requirements for this company for the future year. As management states, even we think that they will be 1 billion company by 2013. It is going to take long time for them to reach at 400 – 500 Crore (maybe 2016 -17).
The style that we advocate and practice in our investing is to look for quality business today which are trading cheap. This approach as we say is, ‘low risk high returns’. This is because, even if market cracks down, a healthy company with no or less debt with high ROE’s and sustainable competitive advantage will still outperform and chances of them to collapse are less. That translates less loss of capital.
To our mind it is more sensible to focus on that which is more predictable – the likely changes to economic enviornment for next 2 to 3 years. From this we can focus on what is important to do now to position portfolios.

Small correction, mngt not told 1 billion by 2013 and told by 2014 meaning by FY15. You are assuming this company assets require hundred of crores for maintainance/working capital to run the business, that is correct for companies with Plant/Machinery kind of assets business models where assets will depreciate with big amounts to run these assets. This company assets are Land and Buildings/pure Infrastructure play which rarely depreciate with very less maintanance costs, there is permanent value attached to them. If the accounting allows Marg lands to show at market prices than the costs at which Marg bought at cost during 10-12 yrs back, then hundred of crores will add to reserves then gearing ratio will not look like too high, that is limitation/conservatism of accounting. Yes I agree this is long term play/pure annuity based assets play. My point is Marg business model is not understand properly and you are thinking this is something similar to Steel/cement/textiles/bharti shipyard etc..kind of businesses which require continuous maintanance costs to run the business apartfrom big investments initially and lacks competitive advantage with small margins. Marg competative advantage is visible with big margins at gross level and further it can expand these gross margins with Scale of operations. Not only Port, but also Marg other assets Marg swanaboomi/Marg properties/Marg junction are similar kind of businesses where profits will multiply with the scale of operations which is missing in your future estimates. It will not suit your style of investing due to fund manager status with other persons funds but it will suit my personal style with 4-5% portfolio initially which will be increased/decreased based on QOQ/YOY results/visibility of SCALE of operations. Thanks

I am already invested in Andhra bank/PFC/REC etc..PSU stocks/banks during Dec 11 correction and in good profits in these counters. I am accumulator of CG,Voltas, BHEL etc..front line stocks in deep corrections including branded/concept stocks like Lovable, Talwalkars, Muthoot etc. In summary I prefer to put three fourth of my portfolio in above kind of stocks and one fourth will be put on Adhunik, Marg, Arshiya kind of value stocks. I know 75% portfolio moves with market and 25% may move slowly. Overall basis one fourth will go to PSU stocks/banks, another one fourth to branded/concept stocks and one fourth to bitten down frontline stocks from different sectors and last one fourth is to Value buy stocks, that is blue print of my investment style which is working fine on overall basis.

Marg will not fall below 80-90 levels even market corrects in big way due to promoter made open offer for 25% equity at 91 per share by depositing 100 crs in banks for open offer and bought 4-5% equity from FII at 97 in big deal which is 25 crs. Promoters/Company does not look like not generating enough cashflows. Promoters bought huge land bank in Chennai in early 2000s at nominal prices and build Marg Swanaboomi Township which will earn regular sale of houses cum continuous rentals from leasing buildings to corporates and even Marg Junction will earn rentals from big Commercial complex-Marg Junction on permanent basis-annuity based revenues and further Company regular basis selling 100 crs worth of houses under Marg Properties. All these quality parameters/annuity business model are not taken into account properly and annuity /permanent earnings has to given higher priority/premium than one time incomes. All these Marg subsidiary businesses not only has potential to repeat the earnings for decades once operational but also will increase volumes/business YOY. Thanks

If I am too optimistic then my portfolio could have been filled with this company shares.I understand the risks associated with these kind of investments and will go small to big holdings level of maximum 10% of portfolio if company is showing performance as per my expected levels. I am optimistic on future prospectus of Adhunik, Arshiya, Marg, Mahucon etc..are part of portfolio to maximum of 20-25% with similar kind of business models. One has to see MARGINS of each business and company ability/inability to expand Margins and benefit company is going get with SCALE of operations and return ratios sometimes will manipulate easily investors and will erase simply for companies with a little margins and not able to expand with margins the scale. I would like mention that big capex on businesses with huge margins which are due to competative advantage and able to margins in future years are not problem. Yes, others kind of regular commodity type/competative businesses, the big capex is the problem, that is drawing line for separating companies with big capex companies. All companies/businesses cannot be treated as same. Thanks

I am surprised with you are telling 150-200 crs profits and not appreciating Economies of Scale after showing clear proofs. May be you are too pessimistic in your approach when its comes to seeing the future. No problem, opinions will differ from person to person based on what they see/view about the future. Anyway thanks for your efforts/views on Marg.

Hi Aziz – Not sure what you mean by company needing 150 – 200 crores every year to keep their business runing [incremental capital].

As I understand the Port Busiess – Once the CAPEX is done with to create the entire infrastructure needed no further CAPEX is further required. Any maintainenec activity would be classified as operating cost [as in any industry] and that would be taken care off under the P&L account before the company arives at profit figures.

Also, in work would be the depriciation factor. Karaikal Port has an concession period of 50 years [30+20] – the cost incurred on CAPEX would be covered by providing for depriciation. So, after XX years any capital put in to create an asset would be free.

So, effectively any Net Profit figure that company declares would be post the operating cost, depreciation. etc………Any figure post that would truely be the free cash flow. And we also need to consider the fact that NP in the initial years might not be much considering higher rate of Depriciation and Interest figures. But 5 years down the line the profit figure could simply balloon.

Marg has created it’s asset at a time when the Interest Rates are at it’s highest….once the rates start coming down [pretty soon] this would further ease the cost pressures.

Also, check the background of the Promoter – He comes from the Investment banking / Finance world – If he is busy shoring his holdings till the maximum possible limits then this need to be taken seriously. He has already increased his holding by 12% in last 1 year and an open offer is pending for the next 20%.

Also, give a thought to the recent fund infusion – Assent valued the Port at 1330 croes at pre-money basis. A third PE firm is eyeing a stake in the Port and the talks doing the rounds is this company could value the Port at around a premium to what Assent paid. Average period of PE investments in a compant at growth stage is 3 years and the investment return they look out for is anywhere 5 – 6 times. If any such stake is bought at times when the markets have not been too good and the stake offloaded is at a time when the markets are really good then the returns could be 8 – 10 times. Karaikal Port sure does fall into this catagory.

Any finally, before March 13 2013 IDFC PE need to convert their CCPS into equity. At this point they could very well offload their share via an IPO and this would be at a significant premium. If the markets are good the promoter too might offload around 5 – 10% of their holdings which could go into retiring significant amount of debt.

Hi Aziz – Earnings for the company would not be great as of now since the company is still in the middle of significant CAPEX cycle. I do hope that you understand that a company creating assets of the magnitute that Marg is creating would for sure face the heat in the initial years. But remember that all major assets are at the end of investment cycle.

I’m amazed to see you statement re debt repayment – let the CAPEX end and cash flow start. How can any company till that point start retiring debt. Also, on the debt repayment part, pls see my earlier post where I talked about Marg creating an escrow account specifically to take care of operating expences and debt management.

Re your point of promoter using debt as major part of funding and very less equity – let me point out that if a project delivered successfully, this strategy could prove to be a boon. With Karaikal Port signs are visible – Port has been doing exceeding well and will be a mojor force to reckon with in TN. It has the best in class infra and has managed to bring on board almost all major companies into export import in and around the port.

We should also not forget that at Phase 2A the port was supposed to have a capacity of 21MTPA and the last Phase was to commence in 2016 taking the capacity to 47 MTPA. But now the Port is going in for further expansion to 28 MTPA before the planned final phase – You think the promoters would do this just for no reasons. They are seeing an opportunity which others are not……

Hold your ratio’s of return on gross block till the time the assets are fully created and start earning revenues.

Re on your final comment around ROI – Firstly the total debt on the books is around 2600 crores and not 3000 crores. Secondly, the compant talked about becoming a BILLION DOLLAR COMPANY in terms of topline by FY14 [5000 Crores]. And as I believe the bottom line would be in excess of 500 croes and debt reduction already having started.

Again Marg is not just Karaikal Port and other assets like Marg Swanaboomi, Marg Junction and Marg properties etc..are big assets base for Marg which will help to rotate the strike and ease of debts burden time to time without blocking capital. Quality parameters like quality of promoter background, quality of businesses and their huge margins levels, Scalability of business and Economies of scale and Substainability of earnings/Annuity earnings etc..are simply over-looked by this platform in spite of some of visible quality features like promoters completion of port in time, promoters buy from 40% plus to 75% (does not look like promoters buy/sell for their own reasons, 5-10% buy/sell is OK but 30-40% shares change of hands does not look to be normal buy/sell) and Proofs from Mundra port how scalability helps in margin expansion both at gross level and net level. Thanks

Thanks Amit, you made the analysis so simple in small summary. The common point everyone agrees is there is clear value in the company assets and one may think 300 crs by 2014/2015, others may think 400 or 500 crs, does not matter much it is 4 to 6 times from present profits in 2/3 yrs and these levels are substainable and can be increased YOY with as the utilisation of plant increases over the years. Simple and straight. Good work.

Hi Amit,
As long as you are happy with your due-diligence nothing matters. For me as a fund manager, this business is not attractive to invest for me or for my fund.
Let me explain in simple terms why it is not for me. For a moment shut the stock market and imagine Marg is not listed company and look at it as a business proposition. You invested 400 Crore rupees from your pocket to run this business and borrowed 2,500 Crore from bank to buy and develop all the attractive assets in your business.
Your required return is 15% (60 Crore) per anum. This business reported 18 Crore in profits and paid you 7.6 Crore in dividend in 2011. They reinvested your remaining money in business.
So start of 2011 your equity in business is 410.4 Crore and your required return for this year is now 113.96 (52.4 deficit of last year + 61.56 Crore expected this year) Crore this year. They really have started rolling business and on standalone results for half year they generated cash profits of 143.27 Crore. You are uplifted, this is really good half yearly results and are way up to your expectations. But hang on, the management comes and say that we are overstretched on our borrowings and need to retire little debt. They pay off 115 Crore of your money to creditors of company. They also decide to keep rest of the money in business and declare dividends at the end of the year.
Another 143.27 Crore of your money is re- invested and your equity investment in business now stands at 553.67 Crore. My required target on my investment for next year will be 83.05 Crore + 113.96 Crore.
I have already invested extra 153.67 Crore in business and have lost 113.96 Crore that I would have earned if invested in other attractive asset.
If you run same scenario from 2007, you will be amazed to see how much extra money you have added in this business and how much you are in negative.
Even when they reach to profits of 500 Crore, will be amazing to see how much of money is given back or invested in favour of shareholders and how much debt will be retired.
This is very simple logic of investments to understand what money is going in the business and what is coming out.
This same logic Ben Graham wants us to understand that in long run market values business on its quality returns.
Hope that helps you to understand & all the best for your investments in Marg.

Hi Nageshwa,
As always mentioned we welcome all views that diverge from my analysis.
Again, in regards to platform, it is not a platform that gives buy and sell signal. It gives quality information of the drivers that can impact value of any business.
End of the day, your performance depends on how you use those tools in your research.
The analysis on Marg is done by me and I came to that conclusion. I used my platform to do research and understand what is happening with its finance and risks I might be exposed to if I invest in this business. Coming on conclusions in regards to platform without using it does not make sense to me.

Dear Aziz, for all your appreciation of ONGC, please do consider ;
The government wanted to sell 12,000 cr. worth shares of ONGC (42.77 cr. shares at a floor price of Rs. 290) today, and the auction – a special scheme that SEBI allows for promoter entities to offload shares in a market parallel to the stock market – seems to have been rescued by the public insurer, LIC.

Only about 29.22cr. shares were sold until the ed of the auction, which means just 8,400 crores were collected. The rest (nearly 4,000 cr.) was pushed through by LIC at the last moment, it seems – though the official statement is that certain buy orders were not recorded.

ONGC shares ended at Rs. 287 for the day, lower than the floor price of Rs. 290. The auction by itself has been a flop – the LIC rescue is what the government does when things don’t go its way; after all, who’s to question the public insurer what it will do with its money?

Earlier, State Bank of India (SBI) said it will bid for shares, which doesn’t make any sense – SBI has huge problems with capital, with a really low capital adequacy ratio; any money it has will have to be used to shore up its capital base. It really has no business buying equity – if it loses, say, 100 cr. when the price of ONGC falls, that further hurts its capital ratios!

This stake sale comes a few days after a huge number of bids flooded Citibank’s stake sale for nearly 10% of HDFC. Perhaps the government thought they’d pull through, but there was one big difference: the price. Citi sold HDFC stake at the 660 levels when it had ended the previous day at 700+. ONGC’s floor price was ABOVE market price – very strange for a large stake sale. (That said, HDFC’s P/E is like 25 versus ONGC’s 10)

But the main issue is: Oil under-recoveries by the likes of HPCL, BPCL and IOC are over 125,000 cr. for this year. Some of this is usually thulped on ONGC; we don’t know how much, and it’s decided at the whims and fancies of the government. Sure, ONGC is quoting at only 10x the profit of FY12, but if these profits can be eroded by a simple random statement that assigns ONGC the bulk of the refiners’ losses, then the uncertainty in earnings makes the share a shaky buy.

The government of course does not want clarity because they need to stuff as much loss to ONGC as possible. They simply cannot subsidize the losses on their own balance sheet, where the fiscal deficit is already at 5.5% of GDP or more. So the profitable public sector oil entities (read; Oil India and ONGC) will have to take big hits through “upstream sharing”. If they do reveal how much, no one will buy the ONGC shares. And I suppose because they didn’t, not many were interested either. The LIC deal may have saved the day: we’ll know soon when the mandatory disclosures come in (LIC already owns 5% of ONGC, they have to disclose further purchases).

We are not debating on your analysis/business logics, they are in line international standards and makes sense to everyone. But We are debating on the base/consolidated figures you are taken to decide the future prospects of company and your timing of taking of these figures.

These is not much scope for discussion here as the base itself is incorrect/highly questionable. As I told initially this company is not straight case/easy case for study for analysis. It will test the best skills of all analysts/fund mangers/general. One will get clarity on this company from FY14 onwards and then one may put their views with much easy and till such time leave this company as it is. FY12 consolidated may be also confusing as expansion is on till Dec 12. FY13 may see some signs and FY14 may give some kind of clarity and FY15 year may give full clarify. This is like indian movies with turns/twists in between and let us how the story ends by FY15. Let us move on to next point of discussion. Thanks

Could you take up one more stock for discussion, Sintex industries well-known brand company which does not require introduction. Results looks fairly good QOQ/YOY excluding forex loss/one time items. But price is gone down to 30-35% and not showing reflection of results, of course that is due to obvious reasons FCCBs repayments pending in FY2013. Mngt ready with funds/cash for 2/3rd FCCB repayments and told 1/3 rd funds will be raised through ECBs. How your are going to see these future certain events and put IV for FY2013 and FY2014 years. Thanks

Hello Aziz..great..one of great at this Blog.Well I am admirer of Mundra port, just because now it is in phase where capex is down and free cash flow will pour in.I find you and Motilal Oswal have some common.Is it? I liked Ramdeo sir style of picking value stock which can give 18-24% retun in long run..long run means 10 years or so not 1 years-3 years. I also appreciates your effort answering all Q.
I am big fan of picking a stock with somekinda moat, less debt or good if cash positive (we Indian just hate Debt isn’t) which can give me 19%+ tax free return for next 10-15 years with lesser churning in my portfolio.19% because 4 years and if money is gettinng doubled with out much risk associated that is a big deal for me.
There are couple of request to you.As a fund manager since you are always invested in 20-30 stocks ,please keep updated us with our new value findings and chnages in intrinsic values from your picks.This will not help and educate us but also bring some discussion and hence earning.
b) you had a post on Indian Banks.if ValueOperations can keep updated such posts once in 6 months that would be great.So whaih stocks moved which way and how the value offered by diferent banks has changed.
c) I also request you to do a scan of housing sector stocks as a sector like HDFC,LIC housing,Dean hosuing .This sector will be a decent wealth creator for coming 10-15 years.
d) As a stocks picks, can you analyze couple of MNCs like Bosch,Wabco India,Akzo,Castrol and Crisil.The choice of these stocks are made on moat,cash rich and having strong promoters .
Lately I have started loving MNCs stocks because of their cash rich balance sheet and strong holding >50% .

I understand your concern and reason why you think that this business should be valued at Standalone basis now.

But I think it should be done on Consolidated basis. Have a thought on my point of view:
Marg invested most of its money in subsidaries by raising debts. Why did not it raised capital? You as a shareholder of this company, convinced with its assets attractiveness would have happily participated in equity raising.

The only reason I can speculate is that the promoters might not have enough cash to participate and their equity in business would have diluted.

Instead of that, promoters came out with 100 Crore’s and made open offer to buy its own companies shares at Rs 90. They had openly shown interest to acquire 75% of this business.

The chairman is from finance background and understands how finance market works. He has also shown interest that in future years they are happy to dilute their equity to retire debts when profits start rising in future.

If I am thinking right then the biggest benefit from all these transaction will be of promoters not shareholders.

My theory of taking consolidated results into account is because once the money comes out of investors pocket and get invested in business, the cost of capital starts from the same day. Not from when that business starts doing business and generating profits from it. Marg is paying the interest on those debts. The money they have invested is not being available to them for free.

On standalone basis we value this business for Rs 90 for March 2012 and on consolidated Rs 60. As an investor, I won’t be interested to pay Rs 90 and ignore the risk associated with those debt. I would like to factor in that and would like to minimise my risk if things go against my aspiration.

Hi Raku,
Thanks for such inspirational comments. Value Operations team and myself welcomes you on this blog and looks forward for valuable contribution from your side in future.

Thanks for comparing us with Motilal Oswal and to Mr Ramdeo. As a privacy policy signed with Value Operations, I am not authorise to reveal what shares I am investing or holding to anyone outside the fund. But stay tuned, I do share many companies that I look forward to invest with and share my views on it.

From fresh financial year I will definatley cover the NBFC and finacial sector on my blog.

Had recieved plenty of influential investors and fund managers call on ONGC last week. As mentioned earlier, I do not see scope of value to grow in double digit for this company.

A lot of politics is involved within this transaction. My recommendation to all of them was, if you cannot understand the risk associated with this transaction then it is better to move on to another available opportunity.

I agree to the point that the biggest benefit is to the promoters and he is beating around the equity and not to be taken 100% trustworthy person/company. For these kind of companies, investors has to move along with promoters actions to get benefits. Thanks for your deep insights/solid views on the company and for your valuable time and efforts.

Hi Parag,
Welcome to our Value Blog.
Hitech gear is rated as ‘B2’ company by our model and is trading at discount of 26% to its March 2012 value.
They have positive cash flow and their debt levels are ‘okay’. They also have healthy returns on equity.
My concern with this company is that they are retaining almost 80% of their profits back into the business and are finding difficult to generate more profits. Most of that money is going in maintainenance. What I mean over here is, most of the money retained is used to keep them competitive in business. This has a direct impact to their returns, and they are diminishing on YoY basis.
Also, it is worth to dig into why their revenues are not growing. In 2011 they grew revenues by 31% and I don’t think they will do the same in 2012.
Try to find competitive advantage of this company before investing. Our expectations for Intrinsic value for this business for March 2013 is Rs 220.
I do not track Goodricke tea as it does not trade on NSE. So won’t be able to share my views on it.
Looking forward for valuable contribution by you in future on this blog.

Nageshwa / Aziz, I didn’t see this mentioned in the thread and so thought of mentioning: The reason Marg’s consolidated turnover is less than standalone is not because the its subsidiaries are making losses. In that case, the consolidated profits (and not turnover) will be less than standalone ones. It is because a large amount of Marg’s standalone turnover is work for its subsidiaries. e.g Marg division will do construction for the port subsidiary. That cannot be included in consolidated turnover. That is probably the reason Marg is tom-toming its standalone turnover.

I personally don’t know the right way to evaluate such companies. Just curious as to why Crisil considers fair value of Marg to Rs 240 or so.

Hi Madhur,
Thanks for your participation on this blog.
Analyst’s and Fund Managers like me when questioned management, why subsidaries being created to do Marg’s work only? (As we take this as attempt by Management to boost their standalone results). The management has guided that currently their subsidaries are working for Marg. But in the future they will look for such kind of work available in market for different companies. This is the the way they are defending themselves for creating 100% subsidaries.
Have a thought on this…?
I cannot comment on Crisil’s valuation method. But we value all the companies looking at their proftability capabilities and business prospects. We do not take market price or market sentiments to calculate its value.

Hi Pradeep,
Thanks for your participation on our blog.
Dion Global has not traded on NSE from last 30 days. I had a glance on Dion Global and found it is making losses from last 5 years and is in lots of debt.
Metkore had accumulated debt previous year and the reason they had to was because they burnt lot of cash in 2011. Its return on equity is very attractive but are geared with debts. They also have issues with cash flow. what do you think about its competitive advantage? we didn’t found any but if you had please share with us all.
Gayatri projects have mountain of debt. the return on equity in 2011 of 4% says it does not have any competitive advantage. Think it this way, if we take all of the shareholders contributed money plus debt and invest them in fixed term deposit the we will earn interest which is 10 times bigger than its current profits. Which investment do you think is profitable?